In Argentina, workers are rioting for a reason. One in five workers is
unemployed and the gross domestic product has fallen by 25% since 1999. The
Argentine peso, which for the last decade was worth a dollar, is now worth a
quarter. The government has defaulted on its debt and most banks are technically
bankrupt. Financial and human flight is rampant. The Argentine provinces are
printing their own currency. Prices are rising and hyperinflation lurks. The
nation has seen five presidents in six months. And the IMF, not to mention the
U.S. government, has largely washed its hands of the country.

How did the Argentine economic miracle of the late 20th century turn into the
economic disaster of the early 21st century? While many blame an overvalued
currency and a lack of fiscal discipline, the underlying reason was a loss of
confidence triggered by economic shocks elsewhere, from Russia to Brazil.

Despite Argentina's decade of impressive economic performance, no one ever
fully trusted its economic institutions. The country has a long history of
defaulting on investors, changing the rules of the game and printing money to
pay its bills. This history hangs like a Sword of Damocles over any policy, no
matter how well intentioned and conducted. Foreign investors can too easily
decide that Argentina isn't trustworthy and take their money and flee.

Given Argentina's financial crime sheet, how can the country acquire the
economic institutions it needs? The answer is simple-import them. Argentina
needs to import a whole monetary system, a banking system and a saving system
that are subject to the world's best supervision.

First, the country should declare the dollar and the euro the sole forms of
legal tender and use its foreign currency reserves to purchase back outstanding
pesos and provincial notes. Making both the dollar and euro legal currencies
reduces the chance of getting stuck with an overvalued medium of exchange. And
by outlawing the peso, neither the central government nor the provinces will be
able to print money to "pay" their bills. Hyperinflation will be a
thing of the past. So will outlandishly high interest rates.

Is this radical? Not really. Ecuador has dollarized its currency. Most of the
European Union has just euroized, and high debt countries, like Italy, can now
borrow at the same rates as Germany. Is this different from the Argentine
dollar-pegging policy of the last decade? Yes, because it definitely junks the
printing presses.

Abandoning the peso means the government can no longer serve as lender of
last resort to endangered banks. Enter step two, which eliminates potential bank
runs. After the government does what it can to shore up current deposits,
Argentine banks should become front offices of major offshore banks in New York,
London, Frankfurt and other banking capitals. An Argentine depositing funds in,
say, Chase Bank in Buenos Aires, would not be dealing with an Argentine
subsidiary of Chase Bank, but directly with Chase Bank in New York.
Consequently, her account would be insured by the U.S. government and supervised
by New York state and U.S. federal agencies. These foreign banks would not only
accept deposits, via wire, but, as confidence in the economy is restored, also
make loans to Argentine businesses.

Argentines need not just safe bank accounts, but also secure and inexpensive
ways to invest their savings. The privatized Argentine pension system was meant
to deliver that for workers. Instead, virtually all of its assets were invested
in now worthless government bonds. That money is gone, but future investments
should be with an offshore account for each Argentine invested in a single
market-weighted global index fund of stocks and bonds. Such a fund would provide
maximum diversification and custodial protectionat close to zero cost.

Argentina also should restructure its debt, replace provincial with municipal
government and de-politicize its judiciary. But fixing the currency, banking and
savings systems should be done today. Argentines and the rest of the world would
get a clear message that the country is once again a safe place in which to
work, save, and invest. Restored confidence would benefit not only Argentina,
but also Brazil and other countries in the region that are being infected by the
same confidence virus that hit Argentina.

Laurence J. Kotlikoff is chairman of the economics department at Boston
University and Juan Pablo Nicolini is president of the Universidad Torcuato Di
Tella in Buenos Aires.